Use economic theory and supporting material to discuss economic reasons in favour and in disfavour of an imposition of a minimum wage.

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Use economic theory and supporting material to discuss economic reasons in favour and in disfavour of an imposition of a minimum wage.

After careful and long consideration, the government in UK decided to implant a National Minimum Wage in April 1999. The wage is set to £3.60 per hour and £3.00 per hour for those who are 18-22 years old. (Economics Online 2017)The Low Pay Commission set up by the government did various research about UK and foreign countries, but there was only a few conviction what the effect will be on the economy. Some supported this decision and there also were some against it. In this essay I am going to try to analyse the effect of minimum wage on different markers and business groups.

A minimum wage is a legally mandated price floor on hourly wages, below which non-exempt workers may not be offered or accept a job. (Investopedia 2017). The main objective of the minimum wage is to give the people that receive wages with a standard of living above poverty. Minimum wage can be achieved by two different ways, either through trade union forcing the firm to increase the wage or through government setting a law to increase the cage. In the UK, the government explored and analysed the economy and figure out what should be the minimum wage be, and in what way it would affect the main problems in UK: unemployment and inflation. The first report of the commission in June 1998 concluded that a minimum wage of £3.60 should be set up. The second report of the commission in February 2000 tried to analyse the effect of the National Minimum Wage had on the economy after the intervention. Their main conclusion was the minimum wage mostly benefit the economy.

Minimum wage legislation is an example of government intervention into the economy due to a market failure. In this case the market failure was that the worker were not provided a level of income that support their standard of living. The government had to provide support to the workers by forcing the firms to set up a wage that would ensure the standard of living of the workers. But this is a policy which the monetarist eonomists do not approve. However, to the Keynesian economist, it is acceptable to have minimum wages imposed if it trigger a multiplier effect and cause growth, especially where the problem is under consumption or the production possibility frontier(PPF) is too low for the economy.
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Diagram 1: Labour Equilibiurm

The main effect, base on the demand and supply theory, is that a minimum wage would lead to a fall in employment, which will cause a increase of unemployment rate. This can be seen from Diagram 1. The equilibrium wage was at PE, and the employment was QE. But with an increast in wage from PE to Pmin, the employment rate falls to Q1,. The supply of labour increases to Q2, which created an unemployment between Q1 and Q2. This is most likely to be unintentional unemployment since people want ...

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